Kerry Group plc

Good morning and welcome to Kerry's 2021 Full Year Results Update call. I'm joined in the call by our CEO, Edmund Scanlan, and our CFO, Marguerite Larkin. Edmund and Marguerite will take you through today's presentation and following this, we will open the lines for your questions. Before we begin, please note the usual disclaimer regarding forward-looking statements. I will now hand over to Edmund. Thanks, William.

Good morning, everyone, and thank you for joining our call. So beginning with slide four and my overview comments, and I would like to state that 2021 was an important year for Kerry. Firstly, on performance, we achieved strong overall growth with group volumes up 8% in the full year. In Q4, group volumes were up 7.6%, which underpinned double digit organic growth for the quarter. And what was particularly pleasing was this growth was broad based across our regions, our end use markets and our channels. In the retail channel, which has seen an increased demand over the past two years, we had volume growth of 5.4% in 2021 and growth of 7% in Q4. And this growth was driven by strong demand for functional food with clinical health benefits, plant based, taste without compromise and products with an improved sustainability impact. Then in the food service channel, which has been impacted by COVID, we delivered excellent overall volume growth of 18% in the year. And when you look back at this performance on a two-year basis, this represented a strong sequential improvement through the year. The 10% volume growth we achieved in the last quarter put us back above 2019 levels. And this is a significant milestone and testament to the hard work our teams have been doing with our customers over the last 18 months. Then from a strategic standpoint, in 2021, we made a number of important strategic developments as we continue to broaden and deepen our technology portfolio. We completed five acquisitions in the year, the most notable being Niocet, which enhances our position in food protection and preservation. and is also a strong compliment to our clean label preservation capabilities. I will explain in a little bit more detail later on on how each of these acquisitions we completed in 2021 and the acquisitions we've announced at the beginning of this year align with our overall strategic framework. The other notable portfolio development we had during the year was the sale of our consumer foods, meats and meals business, the Pilgrims Pride, which completed at the end of the third quarter. Then on footprint, we opened our new taste facility in Durban, South Africa in Q4, which is an important strategic step in our expansion within the continent. During the year, we also commenced production at our taste manufacturing plant in Arapato, Mexico, and at our new state of the art facility in Rome, Georgia, which will support us in meeting the increasing demand for integrated solutions across a variety of protein applications. And finally on strategy, We completed a comprehensive strategic planning refresh during the year, which we presented at our Capital Markets Day in October. And our strategic priorities, key growth platforms, mid-term financial targets, and sustainability commitments for the coming years give us a clear pathway of how we aim to achieve our vision, to be our customer's most valued partner, creating a world of sustainable nutrition. Now moving on to slide five and the taste and nutrition overview. Reported revenue for taste and nutrition was up 9% to 6.3 billion euro, driven by strong volume growth of 8.3% for the year and up 7.2% in the last quarter. And trading margin was 14.6% in the year, up 40 basis points overall. driven primarily by operating leverage, which Marguerite will take you through in a little bit more detail as part of the margin bridge analysis. Growth in the retail channel was very strong in beverage, meat, and bakery-induced markets in particular. The food service channel, as I just mentioned, had excellent growth with all three regions above 2019 levels in the last quarter. And likewise, our emerging markets growth of 14.4%, was well spread across all regions. Overall pricing for the year was 1.3%, with a step up in the last quarter to 2.9%, reflective of increases across our basket of raw materials. In our key growth platforms, growth was very strong in food waste through our food protection preservation portfolio, and in plant-based through new launches incorporating our radical range. We had good growth in authentic taste through launches in beverage with our new botanicals and taste sense ranges and growth in health and biopharma was led by the performance of our proactive nutrition technologies. Turning now to slide six and our end use market breakdown. As you can see from the chart on the right hand side, we had good growth across most of our markets. Firstly, in beverage, we had excellent performance across both the retail and food service channels, with overall growth of 14% driven by innovations in proactive nutrition, authentic taste, and plant-based. Within the food EUMs, we had strong growth in meat and bakery, supported by preservation technologies to reduce waste, while we had good growth in the dairy EUM through ice cream in particular. And in the farmer EUM, cell nutrition delivered good growth which was partially offset by weaker volumes in excipients due to temporary supply chain delays in the year now moving to the next slide number seven and our regional performance within taste nutrition starting first with the americas region we had reported revenue of 3.2 billion and overall volume growth of 6.7 percent despite the impact of supply chain and labor challenges across the industry Performance in North America retail was led by beverage, bakery, and meat end-use markets. And in food service, growth was led by QSRs and coffee chains. And we also delivered strong growth in Latam. And in Brazil, growth was led by beverage and ice cream, while growth in Mexico was led by snacks. Then in Europe, reported revenue increased to 1.6 billion, driven by volume growth of 9.9%. Growth in retail was led by meat, bakery, and dairy. And food service had excellent growth, particularly in the UK and Southern Europe, with an increase in out-of-home consumption, while Russia and Eastern Europe continued to deliver very strong growth. Then in apnea, reported revenue increased to 1.4 billion, with volume growth of 11.3%. And growth in retail was led by meat, beverage, and bakery, and overall food service growth was strong, despite some challenges in parts of the region throughout the year, most notably the restrictions in Southeast Asia. And finally, China and the Middle East delivered strong overall growth. Now turning to consumer foods on slide eight. As you're aware, there's been a significant change in consumer foods as a result of the sale of the meats and meals business at the end of Q3. Revenue for the division was 1.1 billion, reflecting the impact of the portfolio disposal. And we had strong overall volume growth in the year of 6% while recognizing lower prior year comparatives. Pricing in the year was 0.5% and trading margins were back in the division due to the portfolio divestment. Within the year, meats and meals performed very well and dairy delivered strong volume growth through the strings and things snacking range and spreadable butter ranges. And with that, I'll hand you over to Marguerite.

Thank you, Edmund, and good morning, everyone. We were pleased with our overall financial performance and progression in the year against the backdrop of a highly variable marketplace. So beginning on slide 10 and the financial overview for the year, Reported revenue increased to €7.4 billion, with the primary driver being volume growth of 8%. EBITDA of €1.1 billion represents an EBITDA margin of 14.7%. Trading profit of €876 million is reflective of reported growth of 9.8% and 40 basis points margin expansion. Adjusted earnings per share of €380.8 was up 12.1% in constant currency in the year. Return on capital employed increased to 9.9%, which includes a circa 30 basis points dilutive impact from the recent portfolio changes. And free cash flow was 566 million, representing 84% cash conversion. Turning to slide 11 and the group revenue analysis. Overall reported revenue increased by 5.7% in the year, which was primarily driven by strong organic growth, comprising volume growth of 8% and overall pricing of 1.2%. Translation currency had an adverse impact of 1.8% on revenue, driven primarily by currencies in the Americas. And on acquisitions and disposals, there was an overall decrease of 1.7% in the year. This includes a reduction of 3.5% from the disposal of the consumer foods, meats and meals business, partially offset by the contribution from acquisitions of 1.8%, including a strong three-month contribution from NIASET. Moving to slide 12 and the breakdown of revenue volume performance. On the left-hand side is overall group revenue by business, and on the right-hand side is Taste and Nutrition's quarterly volume performance by channel across the year. In the retail channel, which amounts to 74% of revenue, we've seen continued strength with growth above historical levels. And then within the food service channel, Performance across the year represents a combination of the impact of prior year comparisons and strong underlying improvement. We continued to outperform the market with growth of 10.1% in the fourth quarter and volumes above Q4 2019 levels as mentioned. Turning now to our group trading margin bridge. Overall, group profit was $876 million, with trading margins up 40 basis points in the year. Looking at the main drivers, firstly and most notably, we had an improvement of 60 basis points, driven principally by operating leverage, given the level of business volume growth versus the prior year. In addition, there was a positive portfolio mixed benefit, which was offset by supply chain on costs that relate to the management of supply disruption in North America in the second half of the year. Pricing was driven by the increase in raw materials, most notably in the last quarter. The overall 20 basis points reduction in margins was driven principally by the mathematical denominator impact of recovering the absolute increase in raw material input costs through pricing. Kerry Excel was a net 10 basis point dilution primarily relating to investments to drive growth in our key growth platforms. Foreign exchange was neutral from a margin perspective with acquisitions and disposals contributing to a net 10 basis points in the year. Moving next to free cash flow on slide 14. Overall, our free cash flow was $566 million, with cash conversion of 84%. Trading profit was up $79 million. Depreciation was in line with the prior year. Average working capital for the year was a net investment of $38 million, primarily due to revenue growth. On a point-to-point basis, we increased our investment in working capital with higher inventories at year-end due to strategic stock holding decisions, increases in raw material input costs in the current inflationary environment, and also managing through the short-term supply challenges, as we mentioned. And finally, net capital expenditure was 315 million, or 4.2% of revenue for the year, which was driven principally by the strategic capital development projects that Edmund mentioned earlier. Then moving now to our debt profile and credit metrics on slide 15. Net debt was 2.1 billion at year end. And as you can see here from the slide, our debt maturity profile is in very good shape with a weighted average maturity of 5.7 years. During the year when market conditions were favorable, we issued a new 750 million 10 years sustainability linked bond which is reflected in our year-end cash position. Our credit metrics at the end of the year remain strong, with a net debt to EBITDA ratio of two times and EBITDA to net interest of 14.9 times. Overall, we have a very strong balance sheet, which will continue to support our strategic growth initiative. Turning now to slide 16, I'd like to take a couple of moments to give you an update on our refreshed reporting segments for 2022, post the disposal of our consumer foods, meats and meals business, as we announced at our Capital Markets Day. On the left-hand side, you will see our 2021 reported revenue of 7.4 billion, based on our existing segments. And on the right hand side, you will see our pro forma revenue of 6.7 billion, excluding the meat and meals business revenue that has been disposed. From the 1st of January, our taste and nutrition segment will exclude dairy processing activities in Ireland, as this business has now been combined with the consumer foods dairy business to form Kerry Dairy Ireland. On a pro forma basis, the 2021 group revenue of 6.7 billion comprises 5.7 billion revenue in taste and nutrition, and 1.1 billion in Kerry Dairy Ireland. Additionally, with the completion of the Kerry Connect programme, we will include the current centrally held information technology costs within the relevant business segments. So reflecting these changes, the 2021 pro forma EBITDA margin for taste and nutrition would have been 17.7% and 6.3% for Kerry Dairy Ireland. We have included a number of supplementary slides with further financial analysis in the appendix for modeling purposes. Finally, to cover off a number of other financial matters on slide 17, On Kerry Connect, we continued our deployment through the year in North America, and the overall programme is scheduled to complete in the first half of 2022. On non-trading items, there were a number of moving parts. We had a gain on the disposal of the consumer foods, meats and meals business of over 200 million, which was partially offset by investment in Kerry Global Business Services and acquisition integration and other costs. resulting in a net overall credit of 134 million. On the Accelerate Operational Excellence, as we outlined at our Capital Markets Day, our programme will commence in 2022 and run until 2024. We are commencing the manufacturing excellence deployment across over 30 manufacturing operations this year. These are facilities of scale and the focus will be on optimising and re-engineering manufacturing processes at these facilities, enabled by digitalisation and automation. This will be key to facilitating the subsequent relocation of manufacturing across our asset footprint. The programme will result in improved group margins over the course of the plan, with the net overall investment of 120 million, as previously noted. delivering a recurring annual benefit of 70 million per annum by 2025. The majority of this investment will be in the next couple of years, with an expected spend of circa 50 million in 2022, which we will update you on as the year progresses. On raw materials, we have seen significant cost inflation as we move through the second half of 2021, resulting in raw material cost inflation of circa 5% in the fourth quarter. We currently expect mid to high single-digit raw material cost inflation for the first half of 2022, with significant variability across our basket of raw materials. We will continue to use our well-established pricing model to manage the recovery of these raw material cost increases. On dividends, we are proposing a final dividend of 66.7 cents per share, which represents a 10% growth rate. And on currency, the translation headwind on adjusted earnings per share in 2021 was 1.9%, and we are currently estimating a translation currency tailwind of circa 3% on adjusted earnings per share for 2022. To summarise, before I hand you back to Edmund, I'm pleased to say we delivered a strong overall financial performance in the year, especially given the current volatility in the marketplace. And with that, I'll hand you back to Edmund for the outlook and future prospects.

Thanks, Marguerite. Moving now to slide 19, which gives you an overview of how our acquisitions align to our strategic framework. Firstly, you have our strategic priorities of taste, nutrition, and emerging markets at the top level. Beneath this are our four key growth platforms, plant-based, food waste, health and biopharma, and authentic taste. Each of these areas will be important contributors to our growth over the coming years. At the bottom of the slide, you can see our acquisitions since the beginning of 2021. Under food waste, the acquisition of Niacet significantly enhanced our preservation portfolio. And likewise, under health and biopharma, we've built out our proactive nutrition technology portfolio through BioSearch Life and Atrion. The acquisitions of Selecta and Enmex will enhance our biotechnology capabilities, which I'll speak to in a little bit more detail on the next slide. And under authentic taste, we expanded our presence in emerging markets with the acquisitions of Afribon in East Africa and Alamer in Malaysia. Turning next to slide 20 and the overview of Selecta and Enmex. And before we begin, I believe it's important to note that we see biotechnology as an increasingly important area for our industry going forward. driven by the need for more sustainable food and health systems. We have a strong track record in this area, as we've been providing enzymatic solutions and fermentates to our customers for many decades. And our global fermentation capability extends across probiotics, biopreservation, enzymes, and process optimization. Last year, we established our global fermentation science Centre of Excellence to bring together our global pool of talent, support further strategic partnerships and to increase innovation. SEALECTA will be a step change for Kerry's biotechnology innovation capabilities as a platform to create new technologies through its expertise in precision fermentation, optimised bioprocessing and biotransformation for the creation of high-value targeted enzymes and other ingredients. Select is based in Leipzig, Germany, with sales primarily into the pharma market and blue-chip pharma customers in the areas such as gene therapy, vaccines, and active pharmaceutical ingredients. Its portfolio also includes a leading high-intensity enzyme-derived natural sweetener, which is used to sweeten food without adding calories. Selecta has a really exciting pipeline of functional bioactives across food, beverage, and other consumer markets. And we see significant future potential to leverage and commercialize these technologies using Kerry's broad market reach right across a range of end-use markets. Now moving to Enmex, which was founded in 1972 and is a leading enzyme manufacturer based in Mexico. with a broad microbial enzyme portfolio across food, beverage, and animal nutrition markets. It has vast experience in industrial-level bioprocessing and is a leading manufacturer of enzymes for protein hydrolysis. NMEX will also extend our fermentation and enzyme manufacturing capabilities into Latin America. These acquisitions are a great example of our continued commitment to invest in innovation as we aim to develop new sustainable technologies and improve manufacturing processes in our industry. We have an ambition to reach over 2 billion consumers with sustainable nutrition solutions by 2030, and biotechnology will play a key role in all of our growth platforms across authentic taste, plant-based, health and biopharma, and food waste. And now moving to slide 21 and our outlook and future prospects for 2022. Our markets remain highly dynamic with a good overall demand environment, despite the backdrop of COVID and supply chain challenges right across our industry. While market conditions remain uncertain, we feel we are strongly positioned for growth. Our key growth platforms of authentic taste, food waste, plant-based, and health and biopharma underpin a very strong innovation pipeline. As the industry is currently experiencing a period of heightened inflation, we feel confident in our ability to manage through this current cycle, given our track record and established pricing model combined with our cost initiatives. We will continue to strategically evolve our portfolio and invest capital aligned to our strategic priorities and key growth platforms. And finally, we expect to achieve adjusted earnings per share growth in 2022 of five to 9% on a constant currency basis, reflecting the net dilution from acquisitions and disposals in the year. And with that, I'd hand you back to the operator and we look forward to taking your questions.

Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star one on your telephone. We have the first question from James Target from Barenberg. Please go ahead. Your line is open.

Hello. Good morning, Edmund and Marguerite. Thanks for the presentation. So, yeah, a couple of questions on the on the top line outlook, just in terms of volume growth. So I assume you're still expecting kind of four to six percent for, you know, for taste nutrition this year. And I just wondered, now you're talking with, well, if you could confirm that, but also regards to food service, you say it's back to 2019 levels. Do you still expect food service growth to be accretive to the top volume growth rate, considering there's still a changing dynamic, shall we say, in the food service market? And then sticking with volumes, I think looking at the slides, it looks like the dairy unit was about 50 basis points diluted to volume growth in 2021. Is that similar level of dilution that you've seen, say, over the last five years? I'll leave it there. Those are my two questions on volume outlook.

Thanks. Thanks, James, and good morning. Yeah, I mean, I think in terms of your, let's say, your outlook and what you said there, that's pretty much in line with what we expect. We do feel that we are well positioned for growth in 2022 and our volume growth, we expect to be in the range of our long-term targets of the four to six. like we've said previously just from a channel perspective on retail we believe we can grow on the zone of 4% in that channel we've been ahead of that in the last year but going forward we expect to be in that 4 or 4 plus zone of course that doesn't mean every quarter will start with a 4 and on the food service channel You know, there is still a lot of moving parts and, you know, I guess, look, we're very pleased with the fourth quarter, the fact that we are above 2019 levels. And as we look out into 2022, we expect the performance and food service to be ahead of retail. but I wouldn't like to give an exact percentage of that just yet. And then in terms of your comments on the Kerry dairy business from a growth perspective, I think you're on the right track there in terms of the dilutive nature of the volume growth in the dairy business would have been fairly consistent over the last number of years.

Thank you. Thank you. Thank you for your question. The next question from from research. Please go ahead. Your line is open.

Good morning, all. A couple of questions from my side. Firstly, just a follow-up on the last question, just to bridge on the accretion associated with the move to the new reporting structure. So I'm just looking at TNN EBITDA. Perhaps, Marguerite, you can help us bridge that because I see a footnote in the accounts around the allocation center costs. That's my first question. Second question then just relates to M&A. When can we get an update on the NYASET acquisition? And then related to that, just in your opening remarks, Edmund, on Selecta, you referenced the future potential around that business from a commercial perspective. Perhaps you can maybe enlighten us a little bit more with regards to the opportunities out there. There are my three questions. Thank you.

Good morning, Kahl. I might take your first question first before I hand back to Edmunds on the acquisitions. So just on the bridge, as I mentioned a few moments ago, the pro forma EBITDA margin for taste and nutrition, would have been 17.7%. And the movement from 17.5 to the 17.7 is made up of two elements. So firstly, the transfer of the dairy processing activities, as you mentioned, is accretive by circa 100 basis points. And secondly, on the completion of the Kerry Connect program, we will include the centrally held technology costs within the relevant business units, and that is diluted by circa 80 basis points. And that gives you a net 20 basis points accretion. So moving from the 17.5 to the 17.7, as I mentioned.

Then in terms of the questions on the acquisitions and M&A, I would say firstly on NIOSET, the integration is going very well. I would say it's ahead of expectations. And I think what's most pleasing from my perspective is the fact that we've been able to combine and show benefits of combining the technologies that came with NIOSET. to the technologies that we have within Kerry already as it relates to food protection, preservation. So we're creating solutions that have a synergistic benefit for our customers by combining both the technology we acquired through NYSET and primarily the vinegar technologies that we acquired and have subsequently evolved post the acquisition of Fleischmann's. So particularly pleased with how that integration is going and our response from customers and our ability to solve some of the challenges that they have been experiencing on food protection and preservation. Then on the most recent acquisitions, and I think it's fair to say we're very excited about both of the biotech acquisitions that we just announced. On Selecta, maybe just to put maybe some parameters around that, it's a business that we would characterize as an early stage, deep research and innovation company with revenues in the zone of 20 million in 2021. And it's been growing very fast over the last number of years. But when we were evaluating that business, I guess we were looking you know, not just at the short-term potential, but also more the longer term. And maybe just to put a little bit of color on the comments I made there in the presentation, looking first maybe in the health and biopharma, let's say, growth platform, in the short term, we see the opportunity to expand our pharma technology portfolio so we can bring more technologies to our farmer customers within Kerry. In the area of food waste, we're working with a number of customers on converting their byproducts and their waste streams into usable components. And we see the opportunity there where the Selecta platform can be a potential enabler for us to create value from those waste streams. And then in the area of plant-based, we still see opportunity to develop better replacement technologies for things like collagen and gelatin using precision fermentation. So look, time will tell when some of these examples could become mainstream. But this should just give you some idea of how we're thinking about the space. And it's something that we're really excited about.

Thank you.

Thank you for your question. We have the next question from Charles Eden from UBS. Please go ahead.

Good morning, Evan. Good morning, Marguerite. Just one question for me, and I want to come back to slide 19 where you set out the 2021 acquisitions. I note no acquisitions in plant-based, and I just wanted to ask on that, is that because you don't think there are any assets available at the right multiples currently? Is it because you believe you can achieve the solutions in this space through your existing offering in Radical and the OGRJV? I ask just because we've seen recent reports around some potential softening of consumer demand for these products, so I just wanted to get your broader opinion on this sort of longer-term growth engine. Thank you.

Sure. Thanks, Charles. Firstly, maybe just to take your first point on acquisitions, we feel we have a very strong portfolio there. We did a deep dive on this at our CMD and really brought to life what we believe our capabilities are in the space. So I think we're pretty well positioned. I'm not completely ruling out acquisitions in the space, but certainly we feel pretty good around where we are from a portfolio perspective. I would say that we have had great growth in the plant-based space. It represents over 2% of our business, and it's been growing strong double digits for us. I suppose as we look out into the future, we do see that the fundamental drivers behind why consumers want plant-based offerings continue to be strong. But that said, I guess, it is clear that consumers are looking for more choice, better taste experiences, cleaner labels, and frankly, better price points. So that is a challenge, but of course it's also an opportunity for us and the industry. And because of where we're positioned and our portfolio and our customer access, we do feel we are well-placed to address some of those challenges. And we do continue to see plant-based continuing to be a bigger part of our business and bigger part of our story going forward.

Thank you. And can I just push you on strong double digits? Does that mean 20, 30? Are you going to be able to kind of give us any idea what the kind of pace of that growth has been this year?

Thank you. I would say, you know, on the zone maybe of 20.

Super. Thank you.

Thank you for your question. The next question for Alex Lyon from Barclays. Please go ahead.

Hi, yeah, morning all. Two questions from me, please. Just in terms of the change in the segmental reporting, obviously having now Kerry, Derry, Ireland together as one segment and now allocating some central cost to that business. I mean, should we infer from this that, you know, despite the conclusion of the strategic review last year, you might still consider options for this business to in time. That's the first one. And the second one, on the return on capital employee, I think 9.9% in 2021, the capital markets day, you gave an updated target of 10% to 12% on average over the next five years. I appreciate that was not an organic target and I think built in some potential for future dilution from M&A. But maybe you could give us an indication on an organic basis what level of improvement you might expect on this metric in the absence of M&A, or at least confirm that you do expect underlying improvement here as your margins build as per the targets you put out. Thanks.

Good morning, Alex. I might take the return on capital employed question first and just to reconfirm our commitment in terms of return on capital employed as we outlined at the Capital Markets Day. For 2022, we're looking at return on capital employed in the zone of 10%, obviously recognising we will have a dilution impact in the year of circa 20 basis points given the portfolio changes in 21. And obviously the 9.9 that you reference also incorporates a portfolio dilution impact of circa 30 basis points in 21. But we are committed to delivering the return on capital employed as we outlined. So hopefully that gives you a sense of how we're thinking about it. So maybe with that, I'll hand over to Edmund on the other points.

With respect to Kerry Dairy Ireland, over the last few months, we put a very experienced management team in place there who will manage that business for us on a pretty much standalone basis. Like we've said at the CMD, we will selectively invest in this business going forward in areas like snacking and plant-based. Somewhat similar to what we did in our meat and meals business around the plant-based meat area, we will invest in the plant-based dairy element of this business. And also like what we've said in the past, we will continue to remain open-minded on how we can best create value for our shareholders going forward.

Thank you. Thank you for your question. The next question is from Jason Mullins from GoodBody. Your line is open.

Hi, good morning, Edmund and Marguerite. Just wanted to check in on labour constraints. I know you called that out as an impact back in Q3. Just wondering if you saw any impact in the final quarter, maybe some comments around what you're seeing at the moment, given COVID still lingering. And then secondly, in terms of pricing, the pricing that you saw in Q4, 2.9%, can you talk around pricing expectations we should be thinking about for this year and how that would impact margins, given how you report and obviously run for a cash margin position? Thank you.

Yeah, so I take those questions. Jason, I would say in terms of let's say some of the constraints that we saw and that we outlined at the Q3, we did see some, I would say, freeing up of those constraints as we moved into Q4. Now that said, we did experience some Omicron challenges at the very end of the year and at the beginning of 2022. So I would say, look, we're continuing to work through some of those challenges, but everything that we're seeing right now is baked into our guidance. I would say then in terms of pricing, like you said, we saw pricing of 2.9% in Q4. And maybe just taking a step back for a moment, The first thing I would say is that the level of cost increases coming through the supply chain is unprecedented. And like Mark Reed said, we're looking at managing it essentially in two ways, through our cost initiatives and also through price increases. And we have developed a quite sophisticated approach to pricing over the years. And we do have a well-established model And like we said, our approach and our overall objective and the key point is that we're working to maintain our cash margins. And while it's a bit early to say what the, let's say, inflation environment is going to look like out into, let's say, the second half of the year, we feel confident without sounding, let's say, complacent or anything like that, that regardless of how pricing evolves, we feel we'll be able to work through it, really leaning hard into the fact that we have that well-established pricing model in place. You know, we do have a good track record here of managing through inflationary cycles and, you know, despite the increased benefit scale of this cycle. So I think as we look out, our primary objective throughout the course of 2022 will be to maintain our overall cash margins.

I'm sorry, just following on in terms of the guidance that you mentioned, I think Marguerite mentioned mid to high single digits. Is that all your input costs, or is it just raw material, just for clarification?

So, Jason, just on that point, the mid to high single digits that I refer to as raw material cost inflation, and that's how we see it for the first half of 2022. Okay, thanks.

Thank you for your question. The next question from James Target from Barenberg. Please go ahead.

Hi, thanks for taking a quick follow-up. I mean, I just had one new question, which was on reformulation. I mean, I know in previous inflation cycles, you've had a bit of beneficiary of your customer's reformulating to try and reduce the overall cost of their products. I just wondered if you're seeing any benefit at the moment from that and if you expect to this year in terms of your volumes. And then, sorry, if I can maybe just follow up actually on that last question, Marguerite, to clarify that that inflation figure is raw materials. Could you maybe talk about some of your other cost buckets and the communication you're seeing there? Thank you.

I might take the first question first, James. To be honest, we actually haven't seen any significant level of projects as it relates to innovating for value. It hasn't really increased in any significant way over the last number of months. So obviously that's something we're keeping a close eye on. But right now, today, demand is continuing to prove resilient. What we have seen in the US is some of our food service customers reintroducing some meal deals and family deals and things like that. And these deals haven't been a factor for the last two to three years. And this could mean that they are seeing some of their consumers looking for more value options. I'm not making a major call out here, but just rather flagging that we are keeping a close eye on it. But as we sit here today, we haven't seen any significant step up in reformulations for value reasons.

So maybe, James, just on the second part of your question, and firstly, just to reiterate Edmund's earlier comments, we are managing inflation through... through pricing and cost initiatives, and obviously I've spoken to the raw material component. Just on the other inflationary costs, as you'd expect, we continue to see significant inflation, most notably in distribution, energy, and labor costs. we would have flagged this back at the Q3, and we've continued to see that in Q4 and as we look out into 22. Specifically on distribution and energy, we've seen strong double-digit cost increases in 21 and into 22, whereas labor has varied more depending on the local labor market dynamics. And again, similar to what we said previously, we're very much managing these costs costs via a combination of pricing and cost initiatives. And as you can appreciate, a significant amount of work underway throughout the business, pulling various levers to recover these cost increases, either through the cost initiatives or through pricing. As Edmund mentioned, we have a very well-established pricing model, and also we feel a strong record of managing through periods of inflation. Clearly, just given, as we've spoken about before, that dynamic of pricing from a margin perspective, it will have a meaningful mathematical denominator effect on margins in the current year reflective of the raw material cost inflation I've just referenced, notwithstanding that where we sit here today, we do see expansion in our group margin overall for 2022. So hopefully that's helpful in terms of giving you the component parts of how we're seeing inflation.

Yes, thank you very much.

Thank you for your question. We have the next question from John Hennis from Goldman Sachs. Let's go ahead.

Yeah. Hello, everyone. Thanks for taking my question. I guess maybe I can start with a bit of a pedantic one on working capital. I guess you've got an average working capital figure that appears to be quite different to the working capital change in the cash flow statement this year. I think it's a gap of about 150 million. Can we just go through that in a bit more detail? Why is it so different this year? And what, if anything, does that mean for next year? And then my second question is on the Americas region within TNN. I think the growth in 4Q clearly accelerated versus the third quarter, both on a one-year and two-year basis. Can you talk through the drivers of that sequential pickup, and should we expect the strength to flow through into the first half of 2022, or was there any phasing within that performance that we need to be aware of? And then my third, if I can squeeze in a third, is just on the Dairy Island division, because I guess we don't have... much history in terms of margin performance for that new segment. Is the 6% EBITDA margin largely reflective for profitability over a consistent period in time, or is that volatile? Can you give us a bit of a sense of a time series for that segment? Thank you.

So, John, I might just take your first question in relation to working capital and the Just maybe before I speak to the point-to-point, obviously our measure through the business is our average working capital. We feel that it's a better management and performance measure through the year. Just in recognition of the current environment, particularly the supply chain constraints that were visible through Q4, We made a number of conscious decisions in relation to inventory, working capital investment. So the significant movement between the investment in the average working capital and the point-to-point working capital is primarily associated with increased inventory levels. And the reason for carrying higher inventories at the year end, as I mentioned, was driven by the volatility in the environment and the supply chain challenges. But I would make probably a couple of comments just in that context. We made decisions coming into the year and anticipating a strong finish to the year to hold a strategic stockholding of particular raw materials and other stocks. We did have increased, secondly, we did have increased carry connect stockholdings at the year end. You might recollect we pushed out a number of our go-lives just into the last quarter. Some of those manufacturing plants are some of our most complex manufacturing plants, some of which we concluded before the year-end, and a number we deferred because of the COVID impact into the first half of this year. So as we do, we built some de-risk stocks in relation to those sites. There's obviously inflation at play. So there is an increase, a significant increase due to inflation just on raw material costs and that's flowing into the inventory from a point-to-point perspective. And then just finally, as I mentioned, managing through some of the short-term supply chain challenges, we did hold consciously more finished goods stocks in certain areas. So I would say that our year-end inventory investment was uncharacteristically high because of those factors, and we do see that reversing as we move through the year, particularly on the strategic stockholding and also reduced Kerry Connect contingency stocks as we complete the Kerry Connect rollout.

That's helpful, thank you.

So hopefully that's helpful, thank you.

Just maybe to pick up just a quick comment, maybe in the Americas, just to shed a little bit of light on that. North America had good mid-single-digit growth, while LATAM had good double-digit growth in Q4. So that might be just useful in terms of putting a bit of color on that. And the second point I'd make then is that You know, North America has been leading the way for us in terms of innovation, especially I would call out emerging brand innovation, followed by, I would say, a step change in functional food innovation. And lastly, on the food service channel, I know I've mentioned this previously, but we are continuing to see innovation to reduce complexity in the back store operations. So I would say that while there continues to be some challenges as it relates to COVID and some supply chain issues, the fundamentals are good as we look at that region.

Margin one in terms of the dairy margin, the overall Kerry Dairy Ireland, I think, You're asked there, John, is the business that has moved out of Tate's Nutrition into that. I mean, it's in the zone of the overall Cary Dairy Island margin that we've outlined in the appendices. It's not necessarily at that level, but it's somewhat close to that level. That's the way you should think about it. Okay, brilliant. Thank you, everyone.

Thank you for your question. The next question for Heidi, Venice 9, from BNB Paribas. Please go ahead.

Good morning. I just wanted to clarify, do you expect any changes in consumer behavior in response to inflation in any channels or regions, please? And how are you positioning if consumers were to trade down? And then lastly, what's your latest thinking on M&A, please? I think last time you had talked about more assets being available. How is the environment looking now? Thank you.

Good morning, Heidi. The line isn't great there. I think the second question was on the M&A pipeline. So I would say the M&A pipeline continues to be, I would say, quite strong. We have seen, I would say, quite a significant pickup. I might have mentioned this at the Q3 in terms of the the amount of opportunities that are coming across our desk. We are very selective in terms of how we engage and who we engage around some of these opportunities. And we're very focused on opportunities that can really propel us forward as it relates to driving us forward in achieving our strategies. But I would say there continues to be quite a bit of activity and, I would say, a pretty strong pipeline. In terms of, I would say, the response from consumers on the continued inflation, I guess a question I answered previously addressed some of that. So we're not seeing too much from a project perspective at this stage. But our track record here tells us that we've worked with customers in the past to address those trading down issues if they were to happen. And we've no doubt that some consumers will trade down here in a moment in time. So it's something that we're staying very close to. but history shows us that customers will need to be agile and we have the ability to be agile because I think this is something that could change quite quickly. And I think we're well positioned to partner with customers to bring the right products to market with the right value proposition for consumers as they potentially look at maybe compromising on some of the attributes, whether it's nutritional attributes, whether it's taste attributes, or whether it's sustainability attributes. Our perspective on it is that I think consumers will make choices but we don't expect the same response from customers like we have maybe 10 years ago. I think customers will look at being very selective around what attributes they're going to essentially forego. So all that said, I feel that we're well positioned and we'll be able to move quickly with customers as if and when the market shifts.

Thank you.

Thank you for your question. The next question for Laura Monnier from Citi. Please go ahead.

Hi there. Thanks for taking my question. I just had one on food service. I'm just wondering how the exit rate looks in this part of your business. Maybe the different... exit rate by different region. And are you seeing any impacts from Omicron to your business here? Sorry if I missed that. And then I also don't know if I missed, did you talk anything about your expectations for growth in the food service channel this year? Just interested to see how you see that developing. And then my second question would be on going back to your midterm plan, given your CND last year. Your accelerate operational excellence planned investment, I think it was 120 million euros expected over the plan until 2024. Just wondering how we should think about the timing of these investments, whether that will be equally split over the years or whether that would be front or back-end loaded. Thank you.

So, Lauren, I might just take the last question. I mentioned earlier just in relation to the operational excellence the Accelerate Operational Excellence program, that we will commence that program this year, and it will run until 2024. And in terms of the overall 120 million investment over the period of the program, the majority of the investment will be in 22 and 23, and we estimate that approximately in 22 we will have an investment of in the zone of 50 million. So hopefully that gives some clarity as to how that is phased.

So then in terms of the food service performance, It was a very strong finish to the year for the food service channel, and overall volumes were up 10%, and all regions had similar volume growth, so in the zone of 10%. And what is very pleasing is that all three regions were above 2019 volumes in Q4. So we didn't see any noteworthy impact from Omicron in these figures. And then in terms of the outlook, we do expect to outperform here out into 2022. We are seeing more and more innovation. I mentioned the continuation of the innovation around reducing complexity of back-to-stores. We are seeing some reintroduction of LTOs. But that all said, there does remain some uncertainty there at the moment, and we are just keeping a close eye on that. But that said, we do expect a good performance in our food service channel. We feel we're well positioned in the food service channel to grow with our customers there as we look out into 2022.

Thank you.

Thank you for the question. There are no further questions.

much for joining us on the call today so I'm pleased if there's any follow-ups just reach out to ourselves here and we'll be pleased to address any of your questions thank you very much thank you thank you